Referral fees generating a new rule

Nation's Housing

April 07, 1996|By Kenneth R. Harney

WASHINGTON -- In an unusual concession to Capitol Hill Republicans, the Clinton administration has tipped its hand on a forthcoming, controversial regulation affecting homebuyers, mortgage applicants and the industries who serve them across the country.

The controversy concerns referral fees. Should the rapidly growing number of Realtors and homebuilders who own or have interests in affiliates in mortgage lending, title insurance, home inspection, escrow and other settlement services be permitted to pay employees for referring consumers to those affiliates?

For example, say you plan to purchase a new house through a prominent real estate brokerage firm in your area -- call it Megacity Homes Corp. The sales agent with whom you dealt to && locate the house now introduces you to an associate -- a Megacity "consumer service representative." The associate asks for a few minutes of your time to show you a video about the impressive array of other home purchase-related businesses that are affiliated with Megacity in some way. They include:

A wholly owned mortgage banking subsidiary.

A home inspection company that offers discounted fees only to Megacity clients. Megacity is co-owner of the inspection agency.

A fire and hazard property-insurance agency.

An escrow or settlement firm that can orchestrate all the details of your closing, hassle-free.

After the video, the representative notes that you are, of course, free to go out and comparison-shop for these services, but you would "save a lot of money and time" by using Megacity affiliates.

Sounds good. And in large realty firms in numerous markets, something akin to this hypothetical example already exists.

Under a federal regulation adopted in the final days of the Bush administration in 1992, service representatives can receive substantial fees -- the amounts undisclosed to you -- from the parent firm for simply referring your business to one or more of the affiliates. What must be disclosed to you in writing is that business relationships exist among Megacity and its affiliates, and that you're free to shop elsewhere.

Nearly two years ago, the Clinton administration's housing experts took a look at "one-stop shopping" arrangements like this and decided to ban most commissions, fees and other types of referral compensation paid to employees of affiliated real estate service providers.

The Department of Housing and Urban Development (HUD) concluded that by giving realty employees financial incentives to keep lucrative mortgage, title and settlement business inside the corporate tent, the consumer's interest could be compromised.

Rather than encouraging more buyers to comparison-shop among competitors, said HUD, well-paid employees might effectively discourage any shopping whatsoever with enticing promises of price savings and fine service -- whether the promises were accurate or not.

HUD's proposed rule barring most employee compensation for referrals to affiliates raised the hackles of large realty and financial organizations. But only when Republicans took over the House and Senate in 1995 did industry critics gain Capitol Hill allies who wielded direct, strategic power over HUD's budget and entire housing agenda.

Late last month, HUD decided to compromise.

In a House Banking Committee briefing, the agency revealed that its final regulation on referral fees will allow employees to receive fees for referrals to affiliates, as long as the employees only "market," rather than perform, any actual settlement services.

HUD also flashed the green light for referral compensation by a variety of other employees -- a bank teller, for example, who sends a client to the bank's mortgage affiliate.

HUD's forthcoming rule, however, would still prohibit realty agents -- who generally are independent contractors, not employees -- from receiving money or other compensation for directing clients to affiliated businesses.